The existing bank system pushes up house prices?

Positive Money keeps claiming that the existing bank system (sometimes called “fractional reserve banking”) pushes up house prices. E.g. see this video. 

The basic argument is that private banks create money out of thin air and lend it to whoever (mainly mortgagors) and that “freedom to print” pushes up house prices.

Well the first flaw in that argument is that our bank system has remained unchanged for about two hundred years – at least in the sense that private banks can print money. Thus that right to print does not explain the recent and very steep rise in UK house prices. (House prices in the UK have approximately DOUBLED IN REAL TERMS over the last twenty years).

Moreover, other countries around the world have the same bank system, yet in some of them (e.g. Germany and Switzerland), house prices have remained STABLE in real terms over the last twenty years. (See The Economist house price index for figures on house price increases in different countries).

And that rather makes it look like SOMETHING ELSE is behind house price increases in the UK. I suggest immigration plus a reluctance by local authorities to release enough land for house building are two important factors, but I won’t go into detail on that point.


House price volatility.

Note that house price VOLATILITY is not the same thing as long term house price increases. That is, there is no question but that private banks act in a pro-cyclical manner: i.e. they print and lend out money like there’s no tomorrow in a boom and thus exacerbate the boom. And come a recession, they do the opposite, namely call in loans, which exacerbates the recession.

Indeed, it strikes me that banks DO exacerbate house price volatility, but they DO NOT boost house prices in the long term.


Elasticity of supply and demand.

Another point which casts doubt on the whole idea that lending by private banks exacerbates house price increases is that the price of a commodity WILL NOT rise, give increased demand, if supply is elastic. In the case of housing, that means that if the price of timber, bricks, concrete etc and the wage demanded by bricklayers, plumbers etc does not rise in the long term given increased demand for housing, then the price of houses WILL NOT rise even if there is increased demand for housing.

The input involved in house construction which MIGHT RISE given increased demand for housing is LAND. A semi-plausible reason for saying that is the supply of land is limited, thus increased demand might raise the price of land. And indeed the price of land with permission for use for housing has rocketed in the UK in recent decades relative to the price of agricultural land.

But in fact even in the UK, one of the most heavily populated countries in the World, there’s no basic shortage of land. That is, the explanation for the steep rise in the price of land with permission to build on is (to repeat) reluctance by local authorities to grant that permission (partly down to the activities of so called “NIMBIES”, i.e. people nice houses in the country who understandably do not want large housing developments near where they live – “Not In My Back Yardies”)

As for bricks and concrete, the UK is not about to run out of clay for making bricks, not is it about to run out of gravel for making concrete, far as I know.

So the conclusion is that the supply of housing in the long term is pretty elastic, thus even if our bank system DOES INCREASE demand for housing, that shouldn’t raise house prices all that much.